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iPhone’s

AlessandroVerrini3228469

ECONOMICANALYSIS

Studentname:Alessandro

Verrini

Studentnumber:3228469

Lecture:Dr.PeterLuke

iPhone’seconomicanalyse

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Executivesummary

ThisstudyisfocusedontheanalysisoftheiPhoneglobalphenomenon

throughaneconomicperspective.Thereadercanfindanswersregarding

thesmartphone’smarket,thelawsofdemandandsupplyregardingthe

iPhone,itselasticity,andrelativeanalysis.

Itwillalsotakeintoaccountthecostandpricestrategyoftheproduct,with

ashortviewontheethicalissuesrelatedwithitsproduction.

Attheendofthecaseonepossiblestrategytomaintainandexpandthe

iPhonebusinesswillbesuggested.

iPhone’seconomicanalyse

Contents

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Page

1­Introduction……………………………………………………………… 04

2­MarketStructure……………… ……………………………………… 05

3­Demand……………… …………………………………………….…… 07

4­Elasticity………………………………………… …………………….… 08

4.1Cross­elasticity………………………………………………………… 09

4.2Incomeelasticity………

…………………………………………… 09

5­Cost……………………………………………… …………………….… 10

6­Price………………………………………………………………….……

11

7­Conclusion/Expansion………………………………………………

12

8­References/bibliography………………………… …………………

13

9­Appendix……………………………………………………….…………

14

iPhone’seconomicanalyse

1­Introduction

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TheiPhoneistheApple’ssmartphonethatcombinesphone,musicandinternetdeviceinjustoneproduct.It

wasintroducedin2007,and421millionsofdeviceshavebeensolduntil4Q2013(Apple2013).Thelatest

versions,introducedinSeptember2013,aretheiPhone5candtheiPhone5s.iPhonehasbeenphenomenal

totheglobalmarket.ThedemandforiPhonehasgrownrapidlyforeverymodellaunched.Thesuccessof AppleiPhoneinthephonemarkethasbeenfollowedbythepowertoinfluencethemarket,customersand competitors.

iPhoneisalsothemostimportantproductforApple’sshareholders(chart1.0),infactthelastyearit

contributedby51%oftheApple’srevenue,andon65%ofgrossprofit(Apple2013)

Chart1.0Applerevenueandestimatedprofitbyproduct2012

Chart1.0 Applerevenueandestimatedprofitbyproduct2012 Source:ApplecorporatereportandBernsteinanalysis

Source:ApplecorporatereportandBernsteinanalysis

iPhone’seconomicanalyse

2­Marketstructure

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AMarketstructurereferstothecompetitiveenvironmentinwhichbuyersandsellersofproductsoperates.

Thereare4differentstypesofmarketstructure:

­Perfectcompetition,wheretherearemanybuyersandsellers,eachtoosmalltoinfluencethepriceofthe product. ­Monopolyistheformofmarketwherethereisasinglefirmsellstheproductstomanybuyers. ­Monopolistcompetitionreferswheretherearemanysellersofadifferentiatedproductsandenterintoorexit isrelativelyeasy.

­Oligopolyiswhentherearefewsellerofhomogeneousordifferentiatedproduct.(Salvatore,D.2012)

Asthetablen.1.0shows, thesmartphone’smarketstructureisclearlyanoligopolywherealmostthe60%

ofthesalescomesfromfivefirms.(Gartner2013).Thisoligopolyiscalleddifferentiatedbecausethefirmsare

sellingdifferentproductsinthesameniche.AccordingwithSweezy,P.(1939)andhisKinkeddemandcurve

model,theoligopolymarketareaffectedbytherigidityofthe price, soifanoligopolisticincreaseditsprice

itwouldprobablylosemostofitsmarketshare.

Table1.0Worldwidesmartphonesalestoendusersbyvendorin3Q13

Company

3Q13Units(th)

3Q13MarketShare(%)

Samsung

80,356.8

32.1

Apple

30,330.0

12.1

Lenovo

12,882.0

5.1

Lg

12,055.4

4.8

Huawei

11,665.7

4.7

Others

102,941.8

41.1

Total

250,231.7

100.0

Source:Gartner(November2013)

iPhone’seconomicanalyse

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ButthereareevidenceswhyiPhoneisonlypartiallyaffectedbythistheory,(Table1.1)sincetheiPhoneis

themostexpensivesmartphonebutitstillhasapredominantpositioninthemarket.Thereasonsforthis anomalypositionarethefollowing:First,Applehasbeenattheforefrontofsmartphones’innovationforyears, thereforethecompanyhasbeenabletoamassalargequantityofloyalcustomers.Secondly,Apple's marketingcampaignisverystrongandmakesApple'sproductsappeartobefundespitethesteepprices.A thirdreasonisaboutthetrust.Apple'sproductsaremoredurablethanothercompetitors.andalso consumersarenotwillingtopayapricealmostashighasaniPhoneiftheyarenotsureitwilllast.(Seeking

Alpha2011)

Table1.1Smartphone’spricesbasedonretailpricewithoutcontract

Company

Device

Price

Apple

iPhone5s

549£

Samsung

GalaxyS4

499£

Lg

G2

489£

Nokia

Lumia1020

478£

Sony

Z1

429£

Source:Amazon.co.uk(November2013)

iPhone’seconomicanalyse

3­Demand

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Thedemandreferstohowmuchquantityofaproductorserviceisdesiredbybuyers.

TheiPhoneisaluxuryproduct,highdemandedbyconsumers(Graphn.2.0)foritshighbuildqualityandthe

numberoffeaturesitprovides.Itsatisfiedvariousneededofthecustomerssuchas:phone,

entertainment,emailschecking,internetbrowsingEtc.,andforthisreasonthecustomerperceivestheiPhone

asahighvaluableproduct.

GraphN.2.0 GlobalAppleiPhonesalesfrom3rdquarter’07to4thquarter‘13.

GlobalAppleiPhonesalesfrom3rdquarter’07to4thquarter‘13 . Source:Appleinc.(2013)

Source:Appleinc.(2013)

AsanyproducttherearefactorsthataffectthedemandoftheiPhoneworldwide.

Firstly,theeffectonthedemandcausedbyitssubstitutes.Duringitsfirstlaunchin2007therewasabig

technologygapbetweentheiPhoneanditscompetitors,butinthelatestyearstherearenumbersofclosest substitutesofit.Forthisreason thedemandofiPhonedecreasedduringthelaunchofnewcompetitors productswithsameleveloftechnology,orbetter. Ontheotherhandthebrand’simageaffectspositivelythedemandofiPhones:customersofothersApple’s productstendtobefaithfultothebrandpurchasinganApplesmartphone,andtendingtorecommenditto

familyandfriends.(Scott,G.2011)

Thetechnologyisastronginfluencerofthedemandbecausethebuyersarewillingtopayhighpricesfor smartphonesdevices,butonlyfortheiradvancedversions. Mostofthetimethedemandiscreatedbythepresenceofanewtechnologyinthemarket.Also,thefirm influencesthedemandofiPhonesthroughadvertisingcampaignsthathaveahugeimpactonthemarket. Duringthe launchofanewmodel,Appleintensifiesitsadcampaigns,aswellasinastageofmaturityfor thedemandwhenittendstoincrementtheadvertisement.

iPhoneasaluxuryproduct,issensitiveofthechangeinincomebuyers;theEconomist(2012)showshowin

countrieswherethepersonalincomeisincreasing,thedemandofiPhoneincreasesinthesameproportion

showinghowthedemandisbackedtothewillingnesstopay.

iPhone’seconomicanalyse

4.0­Elasticity

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Theelasticityofthedemandmeasureshowmuchthequantitydemandedrespondstochangesintheprice. Thedemandforgoodsissaidtobeelasticifthequantitydemandedsubstantiallyrespondstochangesinthe

price.(Salvatore,D.2012)

FortheiPhoneitdependsfromthemodelandfromthephaseinwhichtheproductcycleis. Ingeneral,thedemandofanewiPhone(luxurygood)isinelasticwhichitmeansthattheincreasinginthe pricewouldmerelyaffectthequantitydemandedfornewiphones.

AstheGraph3.0shows,theincreaseofthepriceofanewiphonefrom500to600producesanew

equilibriuminx’thatevenifthequantitydemandedismerelyless,theprofitsincreasesconsiderable(area

A).AlsoduringthelaunchofanewiPhone(seeGraph3.1)thelimitedsupplyofiPhone5andthefactthat

theproductishighlydemanded(Guglielmo,C.2012)permitthefirmtosetanewequilibrium,andthetotal

revenueincreasesfromAtoB.

Graph3.0InelasticdemandiPhone5

revenueincreasesfromAtoB. Graph3.0 InelasticdemandiPhone5 Graph3.1 LimitedsupplyiPhone5

Graph3.1LimitedsupplyiPhone5

InelasticdemandiPhone5 Graph3.1 LimitedsupplyiPhone5

ThereforefortheiPhone’smodelsthatcameoutbeforetheiPhone5,thedemandbecomeselastic.Apple

hadtolowerthepriceinordertokeepmakingprofitonthem.Applecutthepriceofoldsmodelbythe

averageof200£less(Appleinc.2013)whichproducedanincreaseofthedemandinquantityforoldmodels

openingthemarkettolowincomebuyers,andshowinganincreaseinthecompany’stotalrevenueasthe

Graph3.2shows.(areaB)

Graph3.2ElasticdemandoldiPhones

Graph3.2shows.(areaB) Graph3.2 ElasticdemandoldiPhones iPhone’seconomicanalyse 8

iPhone’seconomicanalyse

4.1­Crosspriceelasticity

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TheiPhone’slaunchinthemarkethaseffectsontheelasticityofothersproducts.Itiscalledcrossprice

elasticitywhich,accordingtoSalvatore,D.(2012),isthepercentageofchangeinthequantityofthegoodA,

respecttothepercentageofchangeinthepriceofthegoodB.Inthepreviousanalysisoftheintroductionof

thenewiPhone5ispossibletoseetheeffectoncomplementaryproducts.Asmostofusprobablyknow,the

iPhone5isbiggerthaniphone4.Therefore,peoplewhoswitchedfromiPhone4toiPhone5neededtobuya

newcovertoprotectit.CrosselasticityofdemandforiPhone5’andiPhone4’scoversisnegativefigure

whichtheyarecomplementtoeachother,soifthedemandofiPhone4decreases,thedemandforiPhone4

coverswillalsodecrease.

OnthecontraryduetothehighperformanceofiPhonecamera,consumerswhoarenotprofessional

photographerwillprefertopurchaseadevicewithmorefuturewhichincludesacamerafunction.Sowecould

saythattheiPhoneisbecomingasubstituteofthecameras,andforthisreasonthecrosspriceelasticitywill

bepositive.

4.2­Incomeelasticity

Thelevelofconsumersincomeisaveryimportantfactorthatdeterminesthedemandoftheproduct.Itis calculatedbypercentagechangedinquantitydemandedofIphoneinrelationwiththepercentagechangedin

incomeofconsumers.AccordingwiththeEconomist(2012),incountriessuchasChinawherethePDI

(personaldisposableincome)isincreasing,thedemandofiPhoneincreasedinthesameproportion.So,it’s

correcttosaythattheincomeelasticityforiPhoneisPositive.(Graph3.3)

Graph3.3IncomeelasticityofiPhone

Graph3.3 IncomeelasticityofiPhone iPhone’seconomicanalyse 9

iPhone’seconomicanalyse

5­Cost

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ThecostsinvolvedwithiPhoneare:labour,manufacture,material,marketingandR&D. DuetothedataavailableforAppleinc.inthischapterhasbeenused$ascurrencyfortheanalyse.

AccordingwithPoeter,D(2012)Apple,fortheproductionofiPhonesdevicesmake30$ofprofitforeach

dollarpaidforthelabour.Thiscostisbasedontheinformationavailablefromthereportabouttheconditionof labourinmanufacturepartnerofApple,FoxconninShenzhen(China). LookingatthisdataascostfunctiontheresultforAppleisconsiderablepositive,butthismightcauseethical issuesregardingtheworkers’conditions:”YouriPhonewasonceacollectionofpartsthatisoftenassembled bychildrenwhowillneverhavetimetoplay,getadecenteducationorknowmuchaboutanythingexcept assemblingelectroniccomponentsuntiltheyaretoooldorworn outtokeepworking.”(ChannelInsiderStaff

2012)

Ontheotherhandtheefficiencyofthemanufactureproductionandtheeconomiesofscalecreatedby homogenizingcharacteristicsoftheiPhone,cutdowncoststomakeit.Infact,asshownintheSuppli

corporationanalyses(seeAppendixtable1.0),thefirstiPhone3of8GBhad280.63$ofproductioncosts,

whilethenewiPhone5sof16gbcosts198.70$IHSinc.Report(seeappendixtable1.1)

OneofcomponentswhichhasmoreimpactonthecostoftheiPhoneisthetouchscreen,andtoassumethis

costApplehasinvestedinLGinc.(PaczkowskiJ.2012),hissupplierofscreen,inordertohaveprivileged

accesstothemandtodecreasetheproductioncostofthescreen. OthercostsassociatedwithiPhonesuchasStoring,distribution,R&Dandmarketingarecalculated (Poeter,

D2012)on93$dollarfordevice.Duetothenatureofthiscostitisnotpossibleanalysetheircostsstructure

inthiswork.

AssumingthatAppleissellingtheiPhone16GBat650$,Appleismakingamarginsof55%,andaprofitof

358$fordevice,sothatintheshortruntomaximizetheprofitApplehastoproducethequantitywhere

marginalrevenueisequaltomarginalcosts(PointBgraph4.0)inordertomaximizetheprofit.

TheareaAofthegraph4.0showthepossibleprofitintheshortterm.

Graph4.0ProfitMaximization

TheareaAofthegraph4.0showthepossibleprofitintheshortterm. Graph4.0 ProfitMaximization iPhone’seconomicanalyse 10

iPhone’seconomicanalyse

6­Price

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AnalysingtheiPhonepricetechniquesispossibletosaythatdependingontheproductlifecycle’sstagethe iPhoneis,Appleuseddifferentstrategies. ThegeneralstrategyoftheiPhonebeingamanufacturedproductistheCost­pluspricing. Estimatedtheaverageofthecosts(seepreviouschapter),thefirmaddsanoverheadcharge. Accordingwith Salvatore,D.(2012),thepercentageoftheprofitsaddedbythefirmsinmanufacturing

industriesisaround25%,butasseenbeforeApplemakesaprofitontheiPhonethatisaround55%(Poeter,

D2012).Whyisitpossible?

Becauseforthenatureoftheproduct,AppleusesanotherpricepracticecalledPrestigeprice.Theysetthe iPhonepricewithanhighmarginsandhighpricesincepeoplearewillingtopayforitduetheprestigethat theygetbyowningit,evenifthereareproductwithsimilarcharacteristicsatlowerprices. Incontrastwiththistechniquethereisanobviousethicalissueregardingtheprestigepriceinvolvedinthe iPhone.Whiletoownaniphoneisprestigious,wehavepeoplethataremakingit,workingonthelimitsofthe

humanrights.(ChannelInsiderStaff2012)Myquestionis:isitprestigious?

Asshowninthegraph6.0,differentiPhonemodels,indifferentstagesoftheproductlifecycle,aresoldat

differentpricesbecauseAppleuseaskimmingstrategy:itintroducesanewmodelathigherprice,then reducesitspriceduringitsgrowthtoincreasethesalesuntilthematuritystage;intheDeclinestage,which

coincideswithanintroductionofanewmodel,thepriceoftheoldmodeldecreasesremarkably.(Table6.0)

Graph6.0iPhoneProductlifecycle

Table6.0iPhone4pricesdifferentstage

Graph6.0 iPhoneProductlifecycle Table6.0 iPhone4pricesdifferentstage iPhone’seconomicanalyse 11
Graph6.0 iPhoneProductlifecycle Table6.0 iPhone4pricesdifferentstage iPhone’seconomicanalyse 11

iPhone’seconomicanalyse

7­Conclusion/Businessexpansion.

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Inconclusion,aftertheanalysepreviouslydone,itispossibletosaythatduetothecharacteristicsofthe

smartphone’sindustryApplecouldloseprofitsinthelongterm(Graph7.0)becauseofitsactual

competitors,andnewones,whocangainmoremarketshare,andasseenbeforeAppleasconsequencewill

decreasethepricesuntilapointwheretheeconomicprofitis0(pointA).Alsosincethenatureofthe

productisnotaprimaryneedforpeople,theriskinconsumers’changesofhabitsandpreferencesishigh:as

consequence,thedemandofiPhonewilldropdown.

Graph7.0iPhonesaleslongrun,withoutinnovation

Graph7.0 iPhonesaleslongrun,withoutinnovation

Apple,inordertokeepdoingprofitaroundtheiPhone,shouldkeepinnovatingandcreatingnewneedsfor customers.ItwillbeessentialforAppletolaunchnewhightechnologicallymodelseveryyear,andstartthe lifeproductcycleagain. Inmyopinion,therightsolutionforAppleinordertoexpandandmaintainitsbusinessistoapplytheProduct

differentiationstrategy(PorterM,1998),developingproductwithuniqueattributesvaluedbythecustomers

betterthantheproductsofthecompetitions.

iPhone’seconomicanalyse

8­Bibliography/references:

Appleinc.(2013),annualreport2013,Paloalto,California

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Apple,FoxconnandChina:TheHumanCostofManufacturing(2012),ChannelInsider,pp.1­2,Business

SourceComplete,EBSCOhost,viewed11December2013

Economist(2012),iPhonesmakeChineseeyeslightup,BusinessSourceComplete,EBSCOhost,viewed7

December2013

Gartner(2013)[Online].Availablefrom:http://www.gartner.com/newsroom/id/2623415[Accessed04

December]

Guglielmo,Connie.(2012).AppleLoop:iPhone5Pre­OrderSellOut,Trade­inFeverandLightning

Strike.Forbes.Com4.BusinessSourceComplete,EBSCOhost(accessedDecember7,2013).

iPhone:StillRidingtheSmartphonePenetrationCurve forNow(2012),BernsteinBlackBook­Apple:CanIt

SuccessfullyMigrateFromHyper­Growth?,pp.15­32,BusinessSourceComplete,EBSCOhost,viewed11

December2013

PaczkowskiJ.(2012),AppleMullingSharpAdjustmentinLCDScreenSupply.[Online].Availablefrom:

2013).

Poeter,D(2012),DoesAppleMake$30PeriPhoneforEveryDollaritPaysWorkerstoMakeThem?,PC

Magazine,p.1,BusinessSourceComplete,EBSCOhost,viewed9December2013

Porter,M(1998),Competitivestrategy,techniquesforanalysingindustriesandcompetitors.1edition,Free

Press

Salvatore,D.(2012)Managerialeconomicsinaglobaleconomy.seventhedition.Newyork:oxforduniversity

press.

Scott,G.(2011),IsBrandLoyaltytheCoretoApple'sSuccess?,Forbes,[Online].Availablefrom:

SeekingAlpha(2011)[Online].Availablefrom:

December]

Sweezy,P.(1939),Demandunderconditionsofoligopoly,JournalofPoliticalEconomy47,568­573

iPhone’seconomicanalyse

9­Appendices:

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Table1.0iPhonemanufacturecosts2007to4thquarter2013(inmillionunits)

Table1.0iPhonemanufacturecosts2013 iPhone’seconomicanalyse

Table1.0iPhonemanufacturecosts2013

Table1.0iPhonemanufacturecosts2013 iPhone’seconomicanalyse 14

iPhone’seconomicanalyse